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Single-payer pharmacare would save billions

In my last blog post, I argued that to overcome the insurance market failures in health care the government must either provide universal public health insurance or tightly regulate the private insurance market. Here I explain why a single-payer universal system won’t bankrupt the health care system. Indeed, it will do the opposite.

Reducing administrati​ve waste

The first way a single-payer system for prescription drugs lowers total costs of medicines is through reduced administration costs. Drug plans must spend a considerable amount of money on administration. This includes a range of tasks, including negotiating contracts, identifying beneficiaries, collecting revenues, processing claims, providing information, managing risk, and marketing.

A report by the World Health Organization estimates that administrative costs for private health insurance are on the order of about 15% of spending in wealthy countries, including Canada. The same report estimates that administrative costs for public health insurance systems in wealthy countries are only 5% of spending – public estimates for Canada are even lower; about 2%.

Administrative costs differ because, when there are multiple insurers in a system that must compete with each other, most administrative costs are duplicated by every insurer. For-profit insurers must also provide their shareholders a return on investment. In contrast, there is no duplication of administrative costs in a single-payer system and some administrative costs – such as marketing – are eliminated altogether.

The additional costs of administration and profits required in a multi-payer system add up considerably. Given that about $10-billion worth of prescription drugs are financed through private insurance in Canada, a single payer system could reduce administrative costs in the system by approximately $1-billion per year.

Increased barg​aining power

Increased administration in a multi-payer system reduces bargaining power in the system and thereby increases the costs of drugs for Canadians. This is particularly important in the pharmaceutical sector, where prices are increasingly determined by the negotiation of confidential rebates paid directly from manufactures to insurers.

If an insurer is a single payer on behalf of an entire province or country, they have considerable purchasing power. In effect, manufacturers will give single-payer systems their best available prices because the rewards of accessing the entire market for a province or country are great – especially when the alternative is to lose the entire market.

Research has shown that the single-payer for pharmaceuticals in New Zealand negotiates brand-name drug prices that are roughly 40% lower than Canadian prices. This compared to the United States, where a report by the US government found that private insurance companies negotiating on behalf of the Medicare drug benefit program were only receiving discounts of about 14% off of brand-name prices – far less than was hoped when the Medicare drug benefit was enacted. Much of the difference likely stems from the fact that single-payers have more bargaining power even when purchasing for a small country.

The discounts single-payers can achieve on generic drug prices can be even bigger. Canadian provinces recently announced that they were working together to reduce the prices of six top-selling generic drugs to 18% of brand name prices in Canada, which would save governments approximately $100-million. While that sounds impressive, it is just a fraction of the savings attainable through the purchasing power of a single-payer.

Three of the six drugs that will have reduced Canadian prices are sold in generic form in New Zealand. The table below lists the new generic prices in Ontario along with the prices obtained by the single-purchaser for pharmaceuticals in New Zealand. As can be seen, what Canadians might view as deeply reduced prices for generics are actually ten times as high as prices that a single purchaser could obtain.

Time to engage Canadians

A single-payer system could save Canada billions through lower drug prices and improved administrative efficiency. But implementing a system that would deliver better drug coverage at lower cost will require political will. It would be the biggest health reform of a generation and would likely meet strong resistance from those whose incomes are dependent on excess spending in our current system.

For those reasons, it is time to engage Canadians in conversations about pharmacare. It is time to face the hard facts about our system and its shortcomings. And it is time to ask Canadians what they want the system to achieve and what options they view as the most acceptable. This is why we developed Pharmacare 2020

Pharmacare 2020 is an evidence- and experience-informed conversation intended to promote clarity about the future of prescription drug coverage in Canada. At a national symposium on February 26 and 27, it will bring together over 200 delegates – including policy makers, patient advocates, health professionals, manufacturers, insurers, and more – to share viewpoints on the system-level problems to address, goals to achieve, and options to consider. After the symposium, the Pharmacare 2020 website will feature conference presentations, expert interviews, and information resources about pharmacare policy challenges, goals, and options for reform.

I hope you will take part in the conversation. Attend the conference, visit the website, and follow @Pharmacare2020 on Twitter. It’s time to start working together to fix our broken system!

Steve Morgan is an associate professor at the University of British Columbia. Follow Steve on Twitter @SteveUBC.

Enter the debate: reply to an existing comment

2 comments

Dr. Doug WeirFebruary 13th, 2013 at 8:51 am

If politicians ever find the political will for a national pharmacare strategy they also need to make sure that the funding is not on the backs of the young but take into consideration ideas like Jeffrey Simpson, the Globe and Mail’s columnist, in his new book, Chronic Condition, Why Canada’s Health-Care System Needs to be Dragged into the 21st Century who also calls for single-payer pharmacare. http://www.allenlane.ca/books/chronic-condition.html

Simpson’s proposal calls for an insurance program to pay for drugs, modeled on the Canada Pension Plan. Like the CPP, people would pay “a social-return contribution” during their earning years in the knowledge they will eventually get a benefit. It is sellable, he argues, because at least 85 per cent of the population will need prescription drugs by the time they are 65, and a universal insurance program would pay for them. He argues it would also be a way to get the federal government back into the healthcare system, create a common national formula, and increase the bargaining power to lower drug prices.

Thanks for another thoughtful article Steve. I appreciate that you (and others) have always been willing to go beyond the research to discuss policy issues – goodness knows that politicians leave a significant vacuum in this domain.

As we know that policy changes are also driven by public opinion – I think it might be helpful to give a few examples of classes of drugs related to osteoporosis and dementia for example to illustrate how a national program might affect costs for government but also for individuals (my 87 yr old parents both suffer from dementia and osteo and pay all of the cost of prescribed preventive measures (Vit D and calcium) as well as the bulk of other prescriptions for these two diseases (~$300/mos)).

This document is provided under the terms of a CreativeCommons Attribution Non-commercial Share Alike license. The terms of the license are available at: http://creativecommons.org/licenses/by-nc-sa/3.0/. Attributions are to be made to HealthyDebate.ca, a project under the direction of Dr. Andreas Laupacis, at the Keenan Research Centre, Li Ka Shing Knowledge Institute of St. Michael’s Hospital.